Thailand’s Coup Builds Case for Emergency Rate Cut: Asean Credit

Thailand’s interest-rate swaps are signaling a cut in central bank borrowing costs to avert a recession after the army took over in a military coup.

The one-year onshore contract has fallen 20 basis points this month to 1.73 percent as a court ousted Yingluck Shinawatra as prime minister on May 7, martial law was declared on May 20 and the military took control yesterday. It’s now 27 basis points below the 2 percent benchmark interest rate after dropping to as low as 1.69 percent on May 21. Sharp declines in the swap preceded the last three rate cuts in March, November and May 2013.

Southeast Asia’s second-largest economy unexpectedly shrank in the first quarter from a year earlier, data showed May 19, after anti-government protests that began in late October emptied hotels, deterred foreign investment and stalled state spending. The Bank of Thailand will reduce its key rate to 1.75 percent on June 18, according to HSBC Holdings Plc and Commonwealth Bank of Australia.

“Once the outflows start, it’s going to be really ugly,” Andy Ji, a currency strategist at CBA in Singapore,’’ said in an interview after the coup late yesterday. “The economy is already being negatively affected. It’s going to worsen if this continues.”

Army Chief Prayuth Chan-Ocha announced on national television late yesterday afternoon that he was seizing control to restore peace after he detained leaders of rival political groups at a meeting meant to find a solution to the nation’s political crisis.

Recession Risk

The coup may damage investor confidence and the central bank will monitor the new government structure and assess their plans for the economy, Governor Prasarn Trairatvorakul told reporters today.

Some 28 people have been killed and hundreds wounded during the protests against Yingluck that were aimed at wiping out the influence of her brother Thaksin Shinawatra, a former prime minister toppled in a 2006 coup. Thailand has only had a caretaker government with limited ability to borrow since parliament was dissolved in December. Elections in February were annulled and it’s unclear when more will be held.

Gross domestic product fell 0.6 percent in the first quarter from a year earlier, compared with the median estimate in a Bloomberg survey for an 0.4 percent increase. The economy shrank 2.1 percent from the previous three months. Thailand could slide into a recession, two straight quarters of contraction, economists at DBS Group Holdings Ltd. and Mizuho Bank Ltd. said this month.

‘Extraordinary Times’

Inflation has quickened every month this year, reaching a 13-month high of 2.45 percent in April. Consumer-price gains have been above the benchmark interest rate since March.

“These are extraordinary times and it calls for extraordinary measures,” Lim Su Sian, an economist at HSBC in Singapore, said in a May 21 interview. “So having negative real interest rates at the moment is really not a big deal.” Lim didn’t respond to a phone call seeking comment after the coup yesterday.

Overseas investors have pulled $1.1 billion from Thai shares and local-currency bonds in May, exchange data show.

The chance of a mid-June rate cut has risen “significantly,” Krystal Tan, a Singapore-based economist at Capital Economics, wrote in a May 21 research note in which she cut her 2014 growth forecast to 1 percent from 2 percent.

Sovereign debt has benefited from the political crisis as investors seek the safest assets. Baht-denominated bonds returned 5.4 percent over the last six months, compared with gains of 8.1 percent for Indonesian securities, 1.6 percent for Malaysian debt and a 0.01 percent decline for the Philippines, according to Bloomberg indexes.

Monetary Policy

The yield on the Thai two-year notes, more sensitive to changes in interest rates, rose one basis point to 2.11 percent in May after falling 50 basis points in the first four months of the year, according to data compiled by Bloomberg.

“Monetary policy is unlikely to help much now,” Siri Ganjarerndee, one of seven members on the central bank’s rate-setting committee, told reporters in Bangkok on May 20. “It can help to alleviate some trouble, but it can’t stimulate the economy.”

A rate reduction in June is unlikely, although there is a 50-50 chance of a cut sometime this year, Vasu Suthiphongchai, a Bangkok-based fund manager at Manulife Asset Management, which oversees $41 billion of Asian fixed-income assets, said in a May 21 phone interview.

“If they cut it further that’s going to affect the baht exchange rate a lot,” he said. “The baht will head south vis-a-vis the U.S. dollar.”

Baht Rebounds

The Thai currency rallied 0.2 percent to 32.55 per dollar as of 1:23 p.m. in Bangkok today, according to data compiled by Bloomberg. It fell 0.4 percent yesterday and has declined 4.4 percent since Oct. 31 in Asia’s worst performance.

Morgan Stanley said before the coup that it expects the currency to weaken 12 percent to 37 per dollar by year-end, while JPMorgan Chase & Co. confirmed its overweight recommendation on the baht this week. The currency will end the year at 33 per dollar, according to the median estimate in a Bloomberg survey.

Five-year credit-default swaps on the notes rose six basis points to 133 yesterday, taking their gain this month to 11 basis points, according to CMA. That compares with a 21 basis point decline in May to 153 for Indonesian securities and a drop of four basis points to 96 for Malaysian government bonds.

‘Credit Negative’

“The coup is credit negative,” Christian de Guzman, vice president at Moody’s Investors Service in Singapore, said in a phone interview today. “One of the negative things that happened in the last coup is that the military took control of the policy apparatus, including the management of the economy. That period was marked by policy incoherence. We aren’t sure whether this will happen again.”

Thailand’s National Economic and Social Development Board said May 19 that it expects the economy to grow 1.5 percent to 2.5 percent in 2014, compared with its previous 3 percent to 4 percent forecast. Nomura Holdings Inc. is more pessimistic, projecting a 1.1 percent expansion in a May 20 research note.

“Given the weak growth backdrop, we believe the BOT will be forced to cut to prop up the economy,” Vivek Rajpal, a Singapore-based rates strategist at Nomura, said in a May 21 e-mail interview. “It’s only a matter of time.”

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